Good day, everyone, and welcome to Carter's Third Quarter 2012 Earnings Conference Call. On the call today are Michael Casey, Chairman and Chief Executive Officer; Richard Westenberger, Executive Vice President and Chief Financial Officer; Jim Petty, President of Retail Stores; and Sean McHugh, Vice President of Investor Relations and Treasury.[Operator Instructions]Carter's issued its third quarter 2012 earnings press release today before the market opened. A copy of the release and additional presentation materials for today's earnings conference call have been posted on the company's website at www.carters.com. Click on the Investor Relations section, then News & Events on the left side of the screen. Before we begin, let me remind you that statements made on this conference call and in the company's press release, other than those concerning historical information, should be considered forward-looking statements and actual results may differ materially. For a detailed discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please refer to the company's most recent annual report filed with the Securities and Exchange Commission. Also on this call, the company will reference various non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the GAAP financial measurements is provided in the company's earnings release. Also today's call is being recorded. And now, your host for today's call, Mr. Casey.

Thanks very much. Good morning, everyone. Thanks for joining us on the call. Before we walk you through the presentation on our website, I'd like to share some thoughts on our business with you. Since our last update, we've achieved a number of significant milestones in our business. We achieved a record level of sales and earnings in our third quarter. We opened our 400th Carter store, we surpassed $100 million in eCommerce sales and completed the transition to our new eCommerce fulfillment center. Sales growth in the quarter was driven by our retail, eCommerce and international businesses. Our profitability in the quarter was driven by the success of our product and pricing strategies and lower product costs. We achieved our pricing objectives in the third quarter. This is particularly noteworthy given the challenge of maintaining prices in this highly promotional and relatively weak retail environment. Our Carter's brand continues to drive the growth of our business. We have very good growth in our Carter's retail segment. We are on track to open 63 Carter's stores this year and our new stores achieved their performance goals. Traffic to our comp stores was inconsistent in the quarter. There were more peaks and valleys in our weekly sales than expected. To drive more consistent traffic to our stores, we have strengthened our direct marketing messages to drive a higher transaction value per visit and encourage repeat visits. And we are investing in a national marketing campaign for Carter's that will launch next week. The objective of this marketing initiative is to further strengthen Carter's as the leading brand in young children's apparel in all channels of distribution. Our holiday marketing arrives in homes this week. It's beautifully executed and focused on holiday dressing. It'll be followed by Black Friday promotions, which includes…

Thanks, Mike. Good morning, everyone. Hopefully, you've all had a chance to access the presentation materials summarizing our third quarter performance, which are on the Investor Relations portion of our website. I'll reference this information as I make my remarks this morning. So starting on Page 2, with some overall highlights. As Mike said, we've had a very good third quarter. In particular, our earnings growth was ahead of our expectations driven by very strong gross margin performance and lower spending on our eCommerce and sourcing project than we had forecasted. Net sales grew 5%. This performance is built on our 23% growth in the third quarter of last year. Our Carter's retail stores, eCommerce businesses and international operations drove our revenue growth in the quarter. Recall that these results reflect the first quarter of comparable Canadian operations as we acquired this business at the end of second quarter last year. Adjusted operating income and adjusted EPS in the third quarter were each up over 50%. On Page 3, the chart at the left shows the components of a roughly $670 million of revenue in the third quarter. Our U.S. Carter's businesses represented about 74% of our revenue base, Oshkosh approximately 16%, and about 10% of net sales in the third quarter came from international markets. In the waterfall chart at the right, we've highlighted the contribution of each business to our overall profit improvement in the quarter. Our U.S. Carter's businesses drove the increase in year-over-year operating income with good profit contributions from both wholesale and retail. Our U.S. Oshkosh businesses and international each contributed about $3.5 million of increased earnings in the quarter. This growth was partially offset by approximately $10 million in higher corporate expenses, resulting in an adjusted operating income improvement of 52% over last year.…

[Operator Instructions] And for our first question, we go to Susan Anderson with Citi.

I was wondering, I guess I just want to follow-up on the Carter's wholesale top line in the quarter. Even x off-price, it seems like it was below expectation like, I think, you guys said. Is that primarily just the delivery issues because then it seems like you expect a pretty significant increase for the fourth quarter, so what's driving the difference?

I'd say Carter's wholesale, the sales were flat excluding the impact of off-price sales and we did have some delivery issues. We had a few suppliers who were running late on their production schedules that started in the second quarter continued into the third quarter. It didn't have -- I wouldn't say it had a material impact on our performance, but it did affect some of the timing of deliveries. What we didn't ship in the third quarter we expect to ship in the fourth quarter. I think it's probably best to look at the wholesale business on an annual basis. And we're expecting good growth for the year of about 5% for the year and then we've got some visibility now into the first half of next year which brings bookings up about 6%. So health of the business is very good.

Okay, great. And then I guess there's no or very little off-price in the fourth quarter, too, which will help?

I'd say it's roughly comparable year-over-year, Susan.

Okay. And then maybe on the OshKosh retail business, I guess I was surprised by the negative comp especially given that you'd de-compare. Maybe if you can talk about kind of what's going on there and what you guys think needs to be changed to drive better performance there and I guess what you're doing to tackle that?

We had hoped the comp would be about flat. That's what our plan was for the year. And I think year-to-date, the comps are just slightly lower than flat, but that was the goal. And so we would have hoped for better performance. I think the decline is some portion of about $3 million from where we would have hoped to be. And on a $670 million quarter, it's not a huge decrease for us. And it's largely driven by some decisions we made to focus more on profitability over comps growth. So there were some promotions we intentionally did not repeat for last year when everybody went -- the back-to-school promotions started, everybody repeated the Big Ten Dollar promotion sale for denim and that's a big hook, it's a big traffic driver, we decided not to do that again this year. Interesting, if you just look at the denim category year-over-year, the sales were down but the profits were up. So we have plenty of sales for Oshkosh. It's a beautiful $400 million business and what we're trying to do is make it more profitable, so we are intentionally changing some of the things that we've done in the past to focus more on profitability and the profit's doubled in the quarter, and you'll continue to see that going forward. So even into the fourth quarter, the comps are still running negative, we're probably about $1 million off our sales plan right now, but the profits year-over-year are higher. With margins, the margins in recent weeks have been running almost comparable for Carter's and we've never seen that before. Still, with a lot of good initiatives by the retail team, by the OshKosh team. We're seeing much better profitability out of OshKosh. So going forward, we're going to have very low comp store expectations as we try to change some of the things that we've been doing in the past to deliver better profitability from the brand.

Great. Yes, the profit did look good in the quarter. And then what about the mall-based stores, I think you said that Atlanta is always doing well, but maybe just touch, in general, on how the group is doing?

I'd say, in terms of the -- we have opened up our first specialty store at the Mall of Georgia. I think if you have a chance to see it, I would go buy a few. We executed smaller than the model we would have liked, but that is the best real estate available to us. And I would say it's off to a good start. Beautifully executed, beautiful presentation of the brand. Smaller product scope. It's newborn to 5T size 5T. Other stores go up to size 12 and so the productivity, I'd say, so far is good. It's going to be the first of, what, Jim, 3 this year? Especially tours we'll have this year. And we'll probably open up some portion of 5 next year. I would view these mall stores as continued R&D. We've only have 3 types of stores that we're trying to manage right now. The factory stores, the outlets and that's where the money is going to be made near-term. Those stores, back in 2010, had very high profit contributions of our business. And then we got hit by cotton and we gave up a lot of what we had gained. But we'll get that back. So the near-term focus is factory stores. We also have brand stores, I think, I'd say we've got some portion of about 20 brand stores which are outlet stores in strip center locations. And performance there, I would say, has been good. And then we just decided, let's add one other dimension, let's bring the brand even closer to the consumer with these specialty stores. And I think it's the best presentation of the brand. The feedback from consumers has been terrific. The store at the Mall of Georgia, 50% of the consumers shopping in it had…

And for our next question, we go to Susan Sansbury with Miller Tabak. Susan R. Sansbury - Miller Tabak + Co., LLC, Research Division: I think you said that you picked up a couple of wholesale retail accounts for Oshkosh. Can you share who these retail accounts are?

Sure, Susan. Costco and Dillard's, I'd characterize it as kind of a test order program with them to start. But we're encouraged. They're very high-caliber retailers and we're pleased that they see what we're seeing which is the great improvement in the Oshkosh assortments.

And for our next question, we go to Scott Krasik with BB&T Capital Markets. Scott D. Krasik - BB&T Capital Markets, Research Division: So just a few questions, actually. The international eCommerce business, that was nice to see you're getting some real numbers there early. I mean, is this something that you can really supercharge into next year? How do you see that ramping?

It's an idea that we're developing right now. So we're using a third-party whose kind of a third party to the stars, the big brands in the United States that enables U.S. brands to reach consumers in other parts of the world. So it's interesting to see where the demand is coming from, Russia, Japan, Brazil. I mean, other places where we don't really have much of a book of business. So I'd say the sales right now are small, but we find it more interesting than having a meaningful impact on our business initially. But there is an opportunity that we're exploring that with some investment, with some focus, in time, I wouldn't say this would be a 2013 initiative, but I would say probably within the 3 years, next 3 years, we could envision sourcing that demand and supporting that demand online directly. So similar with what we did with the initial phase of eCommerce, we knew nothing about eCommerce, we're probably the last company in the world to go online. And so we used a third-party a few years ago to help us get started. It's worked beautifully in the United States. A nice $140 million business for us this year. We're probably in well ahead of what we had envisioned initially when we went down this path. So now we're asking ourselves the question, could we replicate that model in other parts of the world. And so it is -- we think it's an opportunity that is worthy of more function. Scott D. Krasik - BB&T Capital Markets, Research Division: That's great. And then, Richard, what portion of the SG&A increase is related to bringing eCommerce in-house and when do we see that sort of be fully in anniversary?

Well, the expenses for the project are overall part of SG&A. And one of the sources of upside for us in the quarter relative to our forecast was that project delivered earlier and less expensively than we have forecasted last time we were altogether. I'd say we've already started to see that operational benefits. So cost per units are down. The cost, they actually process an eCommerce spots through this facility are probably about 35% lower with our internal operation than they are with our outsource partners. So I'd say that the P&L has already starting to show benefits from bringing that in-house. Scott D. Krasik - BB&T Capital Markets, Research Division: That's good. I guess, I -- so then as we look at 2013, how much in SG&A would not be recurred because of that?

I think that's hard to say, Scott. In terms of transition cost, there's probably a few million dollars that wouldn't repeat. That's more of a project management basis. But we'll give you some good insight on our spending plans for '13 when we get to the February call. Scott D. Krasik - BB&T Capital Markets, Research Division: Okay. And then just this $2.7 million from distribution and freight. I think you talked about air freighting, is that expected to recur as well?

I think that's purely volume-related. The fact that we've had such substantial increases in our top line, that's what's driving the distribution cost. I don't think I mentioned airfreight. That was not a big part of the story for the quarter.

And we go next to Steve Marotta with CL King & Associates. Steven Louis Marotta - CL King & Associates, Inc., Research Division: A couple of very quick questions. First of all, from a bookings versus replenishment standpoint, can you speak in general terms, for the 2 major seasons of the year, spring, summer, and fall, winter, as a proportion of sale, what's prebooked and what's replenished?

I would say about 25% of our business is under replenishment, the lion's share of our business is upfront seasonal bookings. Steven Louis Marotta - CL King & Associates, Inc., Research Division: And that's similar in both seasons?

Correct. Steven Louis Marotta - CL King & Associates, Inc., Research Division: No major differential. And the other question is from a direct sourcing standpoint, can you quantify at all, on a per unit basis, what the benefit is or roughly -- or on a larger scale, what the margin tailwind will be from going from 10% to 20%, to 20% to 30%, that kind of thing?

I would say we're going to start direct sourcing in a meaningful way with spring '13. So we're still working through what the ultimate savings. We have to make some investments initially. I think a better way to think about this direct sourcing initiative is it's one of many components that enables us to get to work our way back to that 44% [ph] operating margin as a company. The other thing too, I think is important for us to focus [indiscernible] we are seeing, even though cotton prices have dropped, cotton prices are higher than they were a couple of years ago. Labor rates are going up, fuels going up. So a big part of this direct sourcing initiative is to create a much more competitive supply chain environment. We'll continue to work with Li & Fung on some portion of -- over time. A lion's share of 50% of the units we source, hopefully we source the other 50% of the units directly. But I think it's going to be largely helping us offset what might otherwise be some inflationary exposure. And so for us to quote the cost per unit share, the overall objective is to improve our margins. This is one of several initiatives to do that. Steven Louis Marotta - CL King & Associates, Inc., Research Division: Okay. Lastly, as it relates to cotton, can you talk a little bit about the costing delta in the fall of this year, as well as spring next year?

Sure. The cross were down. Last fall, about 10%. So they were up 20%, if you recall, up over 20% last year in the fall. And now they're 10% -- down 10%. So we're still -- cross are still higher and as we look at it, we have some visibility into spring '13, those cross will be down about 10%. And it's good.

And we'll go next to Howard Tubin with RBC Capital Markets.

Can you -- Mike, you referenced just the overall promotional environment, can you go into any more detail there, what are you guys seeing out there, whether it's through your wholesale partner customers or your retail stores. How promotional is it?

I'd say every bit as promotional as it was earlier in the year. I'd say it's as promotional as it was a year ago. I don't know what Jim's thoughts on this, but I don't think it's any more promotional. I think the messaging has been more aggressive. All I can do is think about what we've done as a company. I think this past year, we decided we're going to focus on the effectiveness of our promotions. We wanted to make sure that we still had good traffic drivers to our stores, but we intentionally did not repeat some promotions that didn't have a lot of profits attached to them. If you look at some of the materials going to your e-mails, to your home, you'll see some of the -- I think we've really stepped up the beauty, we're in the young kids apparel business. So we have -- we're known as we're the best photography in the business, the most emotional language in our messaging. So if you look at our direct mail pieces year-over-year, for both brands, they're far better than they were a year ago. We thought they were good last year, but they're far better this year. So I would say, I think we've gotten better at our game. And as we've seen the success of some of our pricing initiatives, we're achieving this growth and the growth that we're achieving is higher quality growth, we're getting paid for what we're doing and we're very mindful of the tough economy and so we're focused to make sure we provide great value to the consumer. We are also mindful that we have responsibility of improving the profitability of our business as well.

This is Jim. I agree with everything that Mike just said. And the one thing I've noticed that while the competition out there seems to be much more overt in the form of promotion, I think they've been very aggressive from that standpoint, the beauty of our business right now is that we put in place some key initiatives over the past year to 2 years. More effective allocations, more effective use of our promotional vehicles, coupons, et cetera, and those have allowed us to be much more predictive in the way we've run our business. So less reactive, more predictive. I see the opposite going on in some of the competition. Events changing mid weekend, a recent family and friends event in one of the competitors out there that I'll leave nameless, started out with 1% on 1 day and the following day, increased 2% off. My only -- my kind of assumption there would be that probably it didn't worked so well on day 1. We haven't had to play our game that way. We've got a good game plan in place and we are able to execute it.

That's great. And then maybe just as a follow-on to my question. I know you didn't comment specifically on gross margin in the fourth quarter, but any reason why it can't be as good as it was in the third quarter?

Well, I'd expect the gross margin will continue to show good progress, good recovery there. I'm not expecting it to be quite at the same level that we saw on the third quarter. And largely, that's based on just some more modest pricing assumptions than what we achieve in the third quarter.

And for our next question, we go to Anna Andreeva with FBR Capital Markets. Tom Walton - FBR Capital Markets & Co., Research Division: This is Tom Walton on for Anna. Could you give us some more color on the monthly comp cadence and retail by Oshkosh and Carter's as well? Maybe any color by region. And also, is there any more color that you guys could give on the mass channel, Target versus Wal-Mart and that?

Tom, you definitely didn't sound like Anna when you came. From a trend throughout the quarter perspective, I'll stay away from just specifics about the months, but I will give a trend indicator. Both brands started very strong in July, and then the strength declined slightly as the quarter progressed. In large part, we believe that's a lot to do with the unseasonably warm weathers that hit across the country, especially in some of our Great Lakes areas, in our what we'd expect to be colder climates. So the trend, again, started very strong, declined slightly throughout the quarter in large part, we believe, due to weather. As it relates to geography, it was pretty consistent across all areas of the country. We have 5 regions right now. And to my earlier point, the Great Lakes, which is in the Midwest, North Midwest, it struggled a little bit more from a comp perspective. But -- and that's in the Carter's brand. In the OshKosh brand, it was relatively well-balanced across the country geographically.

Tom, to your second question, we don't have a mass channel any longer in our financial reporting. We have a Carter's wholesale segment that includes those 2 customers. I'd say, in general, we -- those are important customers and we love doing business with them, but that's the extent of our commentary.

And we go next to Margaret Whitfield with Sterne Agee. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: I was wondering if you could elaborate on how October has trended at the stores, both Oshkosh and Carter's, did you see the same trends that you saw toward the end of the quarter or might there have been a pickup?

I would say consistent with the end of the quarter for Oshkosh and an uptick for Carter's. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: And in terms of the international, you reported the overall comp of 1.1%, but the co-branded up 11.6%, what's going on outside of the co-branded stores?

The Legacy Bonnie Togs locations, Margaret, which were about 37 locations comped down about 5%. And that tracks pretty directly to the decline in private label assortments within that store. So we've shifted the balance of sale towards the Carter's and Oshkosh product who are now the majority of the balance of sale in those legacy nameplates and -- but that's why the comp is down a bit. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: And I think you said, in quarter 4, you expect a more modest pricing, what's going on in terms of the private label competition at the wholesale businesses for Carter's in particular?

My perspective is I think the pricing has been comparable to last year. We typically run about a buck or 2 above private label and I think that spread is comparable to what we saw last year. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: Okay. And where will you start the direct sourcing? What product lines will be targeted at the early stages?

I think we're still working through that. Keep in mind, we bought channel industries last year, so they were doing a good portion of the product for us. So I think, initially, it's going to be a little bit more weighted to the playwear and then it will evolve over time. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: Speaking of playwear , it seems like that has been doing better than baby and sleepwear within the Carter's wholesale area. What's going on there?

Well, I think the level of design has come up. We've got good people working on it everyday, the designers, the merchandising strategies, so it's making sure that the playwear looks every bit as good as the baby and sleepwear products. So it's -- it's all about the product performance, beauty of the product offering. Margaret B. Whitfield - Sterne Agee & Leach Inc., Research Division: And final question, where are you on the search for an international head?

That search has been completed. I'll be making an announcement within the next 30 of days.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Casey, I will turn the conference back over to you for any closing remarks.

Okay, thanks very much. Thanks for joining us this morning on the call. We look forward to updating you again on our progress in February. Goodbye.

And ladies and gentlemen, this does conclude today's conference. Thank you for your participation.